“I’ll take my Social Security benefits ASAP, thank you very much.”
That’s the thumbnail summary of what many readers had to say about my recent column on the economics of deferring Social Security benefits. Lots of people out there don’t care that it makes good economic sense. They want cash and they want it now.
The basic idea is simple: “I’ll be more capable of enjoying extra money today. I’m not so sure about tomorrow.” I call it the Hedonic Argument. Our health and age have a lot to do with what we can enjoy.
The argument has a lot going for it. It’s more than just another ploy to eat desert first. Here are the basic arguments:
You can’t spend when you’re dead. Financial planners have a dreary habit of trotting out Monte Carlo simulations— strange probabilistic graphs that look like Medusa on a bad hair day. Then they tell their clients, “Gee whiz, you’ve got a 10 percent chance of running out of money in only 30 years.” They will do the exercise because the joint life expectancy of most couples of retirement age is about 25 years, meaning that one of them will probably live that long. Just to be on the safe side, the planners will add another 5 years.
Well, believe it or not, life is a lot tougher on people than it is on money. According to the United States Life Tables, one of my favorite bedtime reading documents, of 100,000 Americans of all races and sexes, some 83,251 will still be around at age 65. Unfortunately, things start to go downhill pretty rapidly from there. Of that group, 67,331 will survive to 75. This means 19 percent of us are likely to be gone in the first 10 years of retirement while our money lives on another 15 years, or more. By age 85, the threshold of what is now called “old-old,” the number of survivors is down to 37,805. So while your money may have a 90 percent chance of lasting 25 years, we’ve only got a 45 percent chance of making a go of it for 20 years. Only 20,898 survive 25 years, so there is a 75 percent chance we won’t be around to notice if our money outlasts us.
There is a bright side to this. Our Fear-of-Not-Dying is way overdone. It’s going to happen, so don’t worry, be happy.
You won’t spend as much a few years from now. Using research based on the Consumer Expenditures Survey, financial planner Ty Bernicke detailed how our spending really starts to drop after turning age 60. Virtually every area of spending declines materially. Even the increase in healthcare spending isn’t enough to offset all the reductions elsewhere.
I can testify to this. As a margarita drinker, I have become a very cheap date. While I might have dared 3 on vacation in Mexico (and within lurching distance of a hotel elevator), I’m not likely to drink more than one today. Less isn’t always a sign of deprivation.
The spending fund solution.
Fortunately, this problem has a simple solution. Put as much of your savings as you can afford into an “I want it and I want it now” fund that you intend to spend over the next 5 or 10 years. Then spend it down over that time period. Here’s an example. Suppose you have $40,000 in Social Security income and $500,000 in IRAs. If you’re trying to plan on living a really long time and spending the same amount at 90 as at 65 or 70, this means you’ll have about $60,000 a year to spend with $20,000 of it coming out of the IRAs. But if you put $100,000 in your fund and treat the remainder as “lifetime” money, you’ll have $56,000 of lifetime money to spend and a side fund of $100,000 to spend more quickly. Spend it over 10 years and you’ll have $11,723 yearly to spend as you will. Basically, you’ll have traded $4,000 a year of lifetime income for 10 years of $11,723 of spending. The additional amount will buy you a lot more vacations, etc.
The basic task here is a delicate balancing act. We want to avoid remorse about not being able to do things we have the money to do— like climb Everest at 80— but we also want to avoid years of living in fear of future penury. How you choose is your deal.
On the web:
A closer look at when to take Social Security benefits (04/06/2011)
Consumption: It’s Just So 1950 (08/14/2005)
In the future, you’ll need less money (07/17/2005)
United States Life Tables (2006)
http://www.cdc.gov/nchs/data/nvsr/nvsr58/nvsr58_21.pdf
This information is distributed for education purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, product, or service.
(c) A. M. Universal, 2011